C.J. Mcclanahan
By C.J. McClanahan
ReachMore Strategies
A brief summary of the most common errors made by today’s business owner.
Not Understanding the Relationship between Cash Flow and Net Income
Many times when I ask a business owner how much money they made last month they tell me that when the month began they had a certain sum (e.g. — $10,000) in the bank and when it ended they had a different sum (e.g. – $15,000) in the bank so the difference (in this case $5,000) must be their profit.
Unfortunately, in calculating this figure they didn’t consider the following questions:
● Do we track our finances on an accrual or cash basis?
● Did we tap into our line of credit?
● Did we pay down a loan?
● Did we pay all invoices during the month?
● Do we have any significant outstanding accounts receivable?
Many business owners are under the impression that as long as they have enough cash to pay their bills and their salary then everything must be going OK.
In some cases this could be close to the truth, but often this is an extremely inaccurate understanding of the financial health of the business. In fact, many businesses go bankrupt because they have a false sense of security due to a cash position that doesn’t reflect the actually profitability of their company. So, how do you fix this situation?
There are a handful of different solutions, but I recommend preparing the following monthly (or at least quarterly) financial statements (P&L, Balance Sheet and Cash Flow Statement)
and understand how the 3 are related. If this seems like too much effort ask your accountant to provide you with a simple high level summary on a regular basis. If your accountant tells you that they couldn’t possible prepare this type of summary for you – get a new accountant.
● How profitable is your company?
● How healthy is your balance sheet?
Neglecting to Analyze and Understand Margins
What are your margins per product or service? That is, what is the gross profit you make on each sale? Most small business owners can only offer an educated guess.
They spend all of their time worrying about their overall growth in revenue and don’t consider the profit per product (or service) or the amount of effort necessary to deliver that product to the market.
Why is this focus a problem?
Consider the following example for ABC, Inc.:
Totals Sales $ 1 million
Net Profit $ 100,000
Product Breakdown
Sales Profit Margin Effort
Widget A $700,000 $50,000 7% 70%
Widget B $200,000 $20,000 10% 20%
Widget C $100,000 $30,000 30% 10%
When asked which product is the most important to his business the typical business owner will immediately replay Widget A because it represents by far the most sales.
However, a closer analysis reveals that the margin on Widget C is 4 times the margin of Widget A. In addition, Widget C requires far less effort (resources necessary to deliver to the marketplace) than either of the other products.
The best thing that this business owner can do is to shift resources away from Widget A and B and figure out how to sell more of Widget C.
● What is your most profitable product or service?
● Do you focus the majority of your effort on this product or service?
● If not, how much money are you leaving on the table?
C.J. McClanahan
ReachMore Strategies
317 576-8492
cjm@goreachmore.com
